The Chilean roads sector has packed more innovation into the last quarter than many sectors manage in five years. Recent financings and refinancings have included such technology as shelf registrations, liquidity facilities, variable length concessions, and the MDI. The MDI, short for mecanismo de distribución de ingresos, has featured on several recent refinancings, from the smaller reworkings of southern rural concessions, to the Maipo and Santiago airport restructurings.

Vespucio Sur is the first time this principle has been applied to a newbuild concession, and the first time that a bank lender has cofinanced a toll road alongside Chilean bond investors. The deal, led by Santander, insured by XL Capital Assurance, and cofinanced by ICO of Spain, is the last significant urban toll road section to raise financing. A short section of the Amerigo Vespucio orbital road, which encircles Chile's capital, Santiago, still requires an upgrade, however.

The sponsors of the Vespucio Sur section are Sacyr and Acciona, both of Spain. Their consortium, Autopista Vespucio Sur (AVS), won the concession from the Chilean MOP (Ministry of Public Works) in 2001. The concession entails the expansion and rehabilitation of a 23.5km section of the road, which runs through the south of Santiago. The road has five sections and runs through nine municipalities, with 1.65 million inhabitants.

The intervening period has been one characterised by a series of substantial changes to the specifications of the project. In December 2003, the MOP and the sponsors agreed to the inclusion of additional works in the concession. The most important of these is the extension of the City Metro Line 4, for which the concession holder must build seven new stations and the trackwork, which runs between the two sides of the motorway.

The new agreement also calls for the inclusion of a rainwater collection system, one designed for the benefit of the city at large, but which is likely to improve conditions of the road. Such additional works have been features of financings that used the MDI, and often serve as the MDI's premium. But AVS does not anticipate being the victim of weak growth (since it is an urban section), does not need to issue additional debt and is not yet operational.

The sponsors would, therefore, like a cash payment from the government, as well as an extension in their concession to compensate for the delays that the additional works have imposed on the road to completion. The MOP, having originally considered tendering some of the additional works separately, was happy to comply.

The original specifications contemplated a three government payments to the project company of UF652,453 ($20.3 million). The final amount to be paid to the project company, known as the resoluciones, is UF12 million (UF, or Unidad de Fomento, is an inflation-adjusted unit of the Chilean peso).

This sum, which is to paid in instalments upfront, has been monetised by virtue of an UF11 million loan from Banco Santander. The rights to these payments have been assigned to the lender, which also provided a UF3.5 million bridge loan to the project to fund costs in excess of sponsor equity. Santander is also running the domestic bond issue for the concession - UF5 million.

The reason why the bond issue can be this small is that the Spanish development bank - the Instituto de Credito Oficial (ICO) - has also lent UF 4 million (roughly $100 million) to the project. This is the first time that ICO has lent in Pesos, and the second Latin transport deal it has closed in just over a month.

The ICO loan ranks pari passu with the domestic bond issue, and carries the same terms - a 24.5-year tenor and an amortization profile designed to mirror the ramp-up and subsequent revenue streams on the concession. It also has a staggered drawdown profile to avoid the negative cash carry associated with a bond financing - the domestic bond is drawn upfront, but the ICO term loan can be tailored.

The deal has, perversely, been the victim of the record low interest rates in Chile. ICO, which is lending in Pesos, but has its own commercial criteria and cost of funding, found it increasingly difficult to match the terms of the domestic market, and had interest rates dropped any further might have had to exit the deal. But the tranche is still in place, and while ICO has assigned to XL the role of controlling party, it does not benefit from XL's AAA-wrap, as the bonds do.

As it stands, the two will be taking on traffic risk, in common with the other urban sections, with the exception of Costanera Norte. But with an effective eight-year tail thanks to the new agreement, the sponsors have more leeway than their peers. They also, at 4.59%, benefit from the lowest interest rate yet enjoyed on a concession, although sources at the bookrunner concede that low interest rates, as much as any structural superiority, explain this situation.

The deal's sponsors do, however, suffer from one slight drawback, since, as the last to close, and likely the last to be complete, the road has to operate within the toll collection framework set down by the other concessions. Those close to the deal can note that the Sur section has the benefit of Raytheon's electronic toll collection technology, while the others will use Integra's slightly earlier version. But the two Dragados-led concessions, Autopista Central and Vespucio Norte Express, will use one billing operation, while Costanera and Sur will use another. Santiago's taxi drivers will not be amused.

The use of a combined bank and bond financing, given the strides made in the bond markets, can appear a little regressive. And the pension and life companies continue their admirable record of digesting whatever is put in front of them. But, as capital markets continue to develop in Chile, it is possible that infrastructure will have to compete for capital, and bank financing may become more important to sponsors. And the forthcoming wave of Mexican road concessions look like being much more dependent on bank finance than their Chilean counterparts.

Sociedad Concesionaria Autopista Vespucio Sur, S.A
Status: closed 19 November 2004
Size: UF 21 million
Location: Santiago, Chile
Description: bank and bond financing for final urban toll road concession in Santiago
Sponsors: Acciona and Sacyr
Debt: UF11 million resoluciones facility, UF5 million local bonds, UF4 million ICO facility, UF2.5 million VAT facility
Arranger and bookrunner: Santander
Monoline insurer: XL Capital Assurance
Lawyers to the borrower: Jones Day
Lawyers to the lenders: Debevoise & Plimpton